Markets: A dark mine service tunnel

Morgan Stanley’s small mining services index, made up of 22 companies, is down 50 per cent from its post-global financial crises peak in March 2012 and 41 per cent from its 2013 peak in February.

Don’t expect the index to recover anytime soon, says analyst David Evans.

Sixteen of the 22 companies in the Morgan Stanley index lowered their earnings forecasts in the three months to June 30. Four companies lowered their earnings expectation more than once. Only one stock, Clough, has upgraded its earnings outlook during the second quarter.

Evans says beyond the 22 companies tracked by Morgan Stanley, a number of the smaller mining services providers have also announced often large earnings downgrades. A number of companies not seen as pure mining services stocks have also cited the slowdown in the resources sector as a common cause for earnings outlook revisions, he says.

“We do not believe that a bottom has been reached in the current cyclical downturn,” says Evans. “With a few exceptions, we expect the 2014 financial year to see further revenue pressure brought to bear on mining services companies, through a combination of reduced activity, lower contract rates and reduced product sales.”

The Morgan Stanley analyst expects revenue declines of as much as 20 per cent for some mining services companies. In 2015 sales may stabilise for the sector, says Evans.